The Concept of Piercing the Corporate Veil

The Concept of Piercing the Corporate Veil

It is well known that juristic persons and natural persons are completely separate and are capable of holding their own legal personality. The line drawn between these two personalities can from time to time become blurred, and in the interests of promoting justice and pursuing what is fair, this line is sometimes even crossed. Can the actions of one personality have a direct impact on the other? Can a natural person be held accountable for the actions of a juristic person? What circumstances have to arise in order for the line between these two separate legal personalities to become so blurred that in a specific instance they may be treated as one?

In the case of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd, the Court stated that if a company has been legitimately established and is legitimately operated, but is misused in a particular instance, @to perpetrate a fraud, or for a dishonest or improper purpose, there is no reason in principle or logic why its separate personality cannot be disregarded in relation to the transaction in question.

This practice is nothing new, the practice of piercing the corporate veil can be traced back to common law. Since 2008, legislation has adopted the approach of the common law in saying the following:

If, on Application by an interested person or in any proceedings in which a company is involved, a Court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the Court may either declare that the company is deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company, and may make any further order the Court considers appropriate to give effect to such a declaration.

In the past, the Courts have made it very clear that they will not allow a legal entity to be used as a shield from criminal liability. Thus, the Courts have elected to look at the substance of things, rather than mere legal form. The substance refers to the persons and actions done by or on behalf of the company, whereas the legal form refers to the actual legal personality of the company.

This concept does not however only refer to criminal liability. In the case of Airport Cold Storage (Pty) Ltd v Ebrahim, it was held that the directors and members of a company would ordinarily enjoy extensive protection against personal liability. Although this protection is not absolute as the Court has the power to pierce the corporate veil and hold the directors and others personally liable for the debts of the company.

Another noteworthy fact. Prior to the commencement of the 2008 Companies Act, the Act followed was the Companies Act of 1973; according to this Act, penalties for non-compliance resulted in a criminal offence. This means that should you not comply with the provisions of that Act you would be liable to pay a fine or even face imprisonment.

Nowadays in terms of the 2008 Act and the inclusion of the concept of piercing the corporate veil, directors can be held personally liable even for monetary claims from members of the public. However, this Act does not only apply to directors but to “any person” who fails to comply with the provisions of this Act.

From this, it can be seen that even though there are two separate personalities, it can from time to time occur that the Company and the Directors, members or employees just for a specific moment in time, can be regarded as the same!

Duncan O’Connor

Candidate Attorney